How Estate and Gift Taxes Can Impact Your Financial Plan

Three-generation family at home discussing their estate plan

Tom Fridrich, JD, CLU, ChFC®, Manager and Senior Wealth Planner

Giving something you own to someone else. It’s a simple, human act – one that seems like it shouldn’t take too much planning to do it correctly. But when does gifting become a tax issue? What do you need to consider about gifting as it relates to your overall estate plan?

Let’s take a closer look at estate and gift taxes and how you can approach them with a financial planning mindset.

Taxes on Giving???

Why do you have to pay taxes on money you’re giving away? After all, it’s yours! Why is it the government’s business how much you give and to whom?

Giving and exchanging property and assets were once frequently used as a way to avoid taxes. Essentially, money-savvy wealth builders would gift and re-gift assets to shrink their tax footprint. They also used inheritances as a strategy to pass on significant wealth without paying taxes that would normally apply. This continued until the federal government wised up and imposed a federal gift tax.

Does that mean you need to worry about reporting every item given or received on your tax return? Definitely not. There are essentially three exemption amounts that you’ll need to remember:

  • 2024 annual gift tax exclusion: $18,000
  • 2024 lifetime gift tax exemption: $13.61 million
  • 2024 estate tax exemption: $13.61 million

Let’s dig into each of these and how they may apply to your situation.

Annual Gift Tax Exclusion

The annual gift tax exclusion covers the “giving while you’re living” category. The government (IRS) does not want to track millions of small gifts made by individuals to friends and relatives. Every person is provided with an annual gift tax exclusion that allows them to give up to the $18,000 limit without being concerned with reporting the gift or paying federal gift taxes.

Keep in mind that this annual exclusion is per recipient. You could give $18,000 to each of your dozen nieces and nephews in one year without reaching the exclusion threshold. It’s also a per giver amount. So, if you and your spouse want to gift $36,000 to someone, each of you could give $18,000 and avoid hitting the threshold. Finally, the $18,000 limit is adjusted for inflation so that amount should continue to rise over time.

While you may not be considering passing an $18k check to your nephew on his birthday, there may be scenarios where you exceed this amount without realizing. For example, maybe you’re handing over the family’s lake cabin to another relative. Or you’re passing along your prized ’65 Mustang because you no longer drive it and you need the garage space. Either of these situations could take you above the $18,000 annual exclusion fairly quickly. But if you stay below the annual exclusion limit, gifting to others is simple and rewarding.

Gifts greater than $18,000 require you to file Form 709 with the IRS along with your annual tax return in April. But just because you exceed the limit does not mean you’ll necessarily pay federal gift taxes. The lifetime gift tax exemption can help you avoid them.

Lifetime Gift Tax Exemption

The lifetime exemption covers just that – your lifetime. You can give $13.61 million total, stretched over your entire life, before you start getting taxed on it. That might be more money than you’ll ever have and certainly more than you plan on giving away, but think of it in terms of property and businesses. The lake property you bought for a song in the ’70s may have tripled in value, or maybe the small business you started grew into a chain. These items can add up quickly. Let’s look at it in more detail by continuing with giving that exceeds the annual exclusion.

This is also where your lifetime gift tax exemption comes into play. You may use your lifetime gift tax exemption to avoid paying gift taxes on gifts above the threshold. You will also start to tally the gifts you have made in your lifetime that exceeded the annual exclusion.

Let’s say you officially decide to give that prized Mustang to your favorite nephew. Because the Mustang’s value is $27,000 you end up with $9,000 counted against your lifetime exemption, which allows you to avoid paying any gift taxes on the gift. Even when you give above the annual exclusion limit you may be able to avoid gift taxes because of the lifetime gift tax exemption. You’ll have to track your giving, but the exemption, at least right now, is set at $13.61 million. You only made a small dent in your lifetime gift tax exclusion. You can give away a lot more Mustangs with that large number!

Estate Tax Exemption

The lifetime gift tax exemption and the estate tax exemption are considered unified. This means any gifting you do during your lifetime reduces the amount you can leave to loved ones when you pass away. For 2024, the lifetime gift tax exemption and the estate tax exemption total $13.61 million per person. To help illustrate how they work together, consider this scenario:

Sally is generous with her kids, gifting them all sizable amounts to help pay for their first homes, start businesses, or make whatever investments they see fit. She ends up giving away $2 million total. Then, she meets with her financial advisor to review her estate plan. She’s gifted $2 million already, leaving her with $11.61 million that she can give the kids without incurring any kind of estate tax. This makes $13.61 million in total for her lifetime and estate giving.

The IRS doesn’t care when you give your assets away. You can decide to do all your giving during your lifetime or you can decide to hold onto all your assets until you die. But you can only give away $13.61 million total during your lifetime and at death. Once you exceed that number you are subject to gift or estate taxes.

Tax Cuts and Jobs Act Impact on Gift Tax – Act Now!

The lifetime gift tax exemption and the estate tax exemption are at such high levels because of the Tax Cuts and Jobs Act of 2017 (TCJA). But this won’t last forever as the TCJA is set to expire at the end of 2025. Then, if no other legislation is passed, the estate tax levels would revert back to pre-TCJA levels.

The lesson here is that the time to act is now. If you’re planning to give away large amounts or transferring quite a bit in your estate plan, make and confirm that plan now so you can take advantage of the exemption threshold.

The tax above the $13.61 million threshold is substantial: 40%! This is definitely worth avoiding and could dramatically eat into any legacy you’re trying to leave.

Gift Tax Considerations and Strategies

As we look ahead, we know the 2024 election and the TCJA sunset in 2025 could mean changes in the administration and legislation. Most of us don’t want Uncle Sam to be our primary beneficiary, so there are a few things to keep in mind as you strategize your own giving and plan for your estate.

Gifting vs. Waiting Until You Die

One decision to make is when you want to give away your wealth. If you need all your assets to satisfy your income needs during your lifetime, holding on to your wealth until you die is the only option. But if you have more flexibility because your net worth is more than you can spend in your lifetime, then you have some decisions to make.

Giving away assets while you are alive can be a more strategic way to give because not only do you remove the amount you gift from your estate, but you also remove the growth on that gifted amount from your estate. So, if you made a sizeable gift of $1 million to your 10 grandchildren when you hit 70, not only is the $1 million out of your estate but so is the gain that would have occurred on that amount. Over 10, 15 or 20+ years, that growth could have caused the $1 million to double or triple.

If you are contemplating a larger gift, talk to your financial advisor to first to make sure you can afford it. If you can, larger lifetime gifts can go a long way to reducing your taxable estate.


We’ve mentioned this technique briefly above. The $18,000 a year exclusion is per giver and per recipient, so you can give $18,000 a year to as many different people as you want without affecting your lifetime exemption amount. Also, if you and your spouse would like to give someone $36,000 of your family money, you can give half of it from each of you without hitting the threshold.

If you engage in gift splitting with your spouse, you can reduce the size of your estate quite significantly over time and reduce your exposure to estate taxes at death. Keep in mind, there are some states with estate taxes that may have exemption levels that are lower than the federal exemption amount, so be sure to consider those limits within your gifting strategy as well.

Charitable Giving

Charitable giving can often help your tax situation while you are living or after you’ve passed away. While you’re living, qualified donations can reduce the size of your estate and help you to get below thresholds. They also don’t count toward your lifetime exemption amount.

In the same vein, bequests in your estate to charity don’t count toward the overall $13.61 million threshold. If you are already a regular giver to causes and groups, planning strategically with your charitable gifts can help you keep your benefactors out of heavy tax territory.

Other Options to Maximize Gifts and Tax Planning

There are other options you can discuss with your advisor to optimize your giving and make a tax smart plan. Trusts, life insurance, Roth conversions and other strategies can help you minimize the tax burden to yourself and your beneficiaries. Your advisor can help you put together a custom strategy for your wealth profile and goals.

This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

Converting from a traditional IRA to a Roth IRA is a taxable event.

Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.

A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

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